Economic Protectionism: A Weed Choking Monsanto’s Supply Chain?
Is agribusiness threatened by its dependence on innovation and intellectual property in an age of economic protectionism?
Agricultural Protectionism’s Strong Historical Yields for Monsanto
While increasing global isolationism threatens to destabilize global supply chains, farmers in the United States and Europe have historically benefitted from protectionist measures. The agricultural sector was exempted from post-World War II tariff agreements, a decision justified by the need to maintain domestic self-sufficiency. Developed nations have relied on a mixture of subsidies, price supports, production restrictions, and border measures to protect domestic agriculture. These protectionist policies are estimated to cost the average non-farm household in developed nations approximately $1,000 annually. [1]
Agricultural conglomerates such as Monsanto have captured the benefits of agricultural protectionism, since they are able to profit from a subsidized economy. However, Monsanto has shifted its business from a product-based model to an intellectual property-based model in recent years, and so isolationist policies pose a different set of risks.
During the late 20th century, Monsanto’s flagship product Roundup accounted for half of Monsanto’s revenues, and was delivered to farmers around the globe. [2] Today, Roundup comprises only 10% of the company’s annual revenue. [3]
Source: http://blog.ditteshjemmeservice.dk/2015/
Today, Monsanto’s revenues are driven by developing and patenting seed varieties, which it licenses to farmers and competitors. In this context, the intellectual property of new seed varieties becomes the top of Monsanto’s supply chain. In this business model, Monsanto’s supply chain is focused on distributing licensing rights for its IP, which is roughly analogous to the finished goods portion of a product-based supply chain.
Economic Protectionism: A Tough Row to Hoe?
Protectionist economic measures put pressure on Monsanto’s supply chain by diminishing the incentive to produce new intellectual property. In the early days of its shift towards an innovation-driven business model, Monsanto acknowledged that it wasn’t able to invest significantly in Argentinian seed development, because the country’s weak property rights laws meant there wasn’t adequate return on innovation. [4]
In a more recent instance, Monsanto chose not to release a new generation of cotton seeds in India, and ultimately sold its cotton seed business there, after a bout of legislation with the Indian government on price control mechanisms and whether Monsanto can be compelled to share its intellectual property with local seeds companies. [5]
Source: http://www.livemint.com/Politics/NdDYRxsayfh2655qOqy7mI/Centre-notifies-Bt-cotton-seed-prices-slashes-royalty-fees.html
Monsanto has historically benefited from artificially inflated agricultural prices in developed economies. However, given its shift to an IP-driven business model, protectionist agricultural policies imperil its incentive to innovate new technologies, which are at the top of its current supply chain.
How is Monsanto Weathering Global Protectionism?
Perhaps because of its history of benefitting from economic protectionism, Monsanto has not taken particularly innovative steps to preserve their IP. Both its short-term and medium-term strategy to develop IP have relied heavily on mergers and acquisitions. In 2015, Monsanto attempted to acquire Swiss agrochemicals firm Syngenta, in an effort to improve its IP and its reach within Asia and Africa. After Syngenta rejected the offer, Monsanto has been pursuing a merger with German chemical company Bayer, which it believes will allow for increased innovation efficiencies. However, this proposed merger is still undergoing review by the European Union, which is concerned about the impact of the merger on seed prices and claims that it could lead to decreased innovation. [6]
How Else Can Monsanto Get Its Ducks in a Row?
Global isolationism’s disincentive to innovate chokes the top of Monsanto’s supply chain, intellectual property. Monsanto’s reaction to increasing economic protectionism has entailed using mergers and acquisitions to obtain new IP. However, this strategy risks making a large conglomerate even more unwieldy, and not nimble enough to innovate effectively.
Because of the time needed to develop IP, especially agricultural IP, effective short-term solutions are few and far between. However, by encouraging low-cost innovation in a wide variety of geographies, Monsanto may able to continue expanding IP at a similar cost. By sponsoring agrichemical science competitions in the vein of the Intel Talent Search, Monsanto may be able to reap the proceeds of creative new ideas in a wide range of geographies at a relatively low cost.
Over the medium-term, Monsanto should focus on creating intellectual property which can be applied to all geographies. Rather than investing in countries that are likely to increase agricultural protectionism or weaken property rights, Monsanto should focus on developing products that can be sold globally, with little additional marginal cost per new geography. This will the required return to develop new IP, although it may diminish the efficacy of new products.
Are there other ways for Monsanto to monetize its innovation in a political climate that is increasingly protectionist? Should they attempt to develop innovative talent inside the organization, or is their current merger-driven strategy appropriate? Should Monsanto limit its presence in certain economically inhospitable countries, as it did in India?
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[1] Michael Trebilock, “The Puzzle of Agricultural Exceptionalism in International Trade Policy,” Journal of International Economic Law, 18:2 (June 2015).
[2] David Barboza, “The Power of Roundup; A Weed Killer Is A Block For Monsanto to Build On,” New York Times, August 2, 2001, http://www.nytimes.com/2001/08/02/business/the-power-of-roundup-a-weed-killer-is-a-block-for-monsanto-to-build-on.html.
[3] “The parable of the sower: the debate over whether Monsanto is a corporate sinner or saint,” The Economist, November 19, 2009, http://www.economist.com/node/14904184.
[4] Peter D. Goldsmith, “Innovation, supply chain control, and the welfare of farmers: The economics of genetically modified seeds,” The American Behavioral Scientist, 44:8 (April 2001).
[5] “Monsanto Pulls New GM Cotton Seed From India in a ‘Major Escalation,’” Fortune, August 25, 2016, http://fortune.com/2016/08/25/monsanto-gm-seeds-india/.
[6] “As the Pool of Agribusiness Giants Shrinks, Will Innovation Follow?,” Stratfor Worldview, September 8, 2016, https://worldview.stratfor.com/analysis/pool-agribusiness-giants-shrinks-will-innovation-follow
I agree with Sarah’s contention that protectionism has played a significant role in shaping the history of Monsanto, but I do not think that the company’s shift to an IP driven business model fundamentally alters the dynamics of protectionist policies on the company. Rather, I would argue that the heart of the innovation problem that the agribusiness industry is facing lies in extreme consolidation. As the number of market participants has shrunk dramatically, some are able to operate as effective monopolies [1]. While isolationism does perhaps pose increased risks to Monsanto, for example as local investments in innovations may be lost (as Sarah mentions), this is still counterbalanced by the powerful effects of subsidized economies. The real threat of protectionism on the company is if nations begin to place disproportionate burdens on foreign companies.
[1] Brad Plumer, “Why the Debate Over the Bayer-Monsanto Deal is so Important for the Future of Farming,” Vox, accessed November 2017, https://www.vox.com/2016/9/20/12988616/bayer-monsanto-dupont-dow-agriculture-mergers-innovation.
Should Monsanto develop innovative talent inside the organization or participate in M&A? I see many parallels between the pharma/medical device industry to the increasingly IP-centric agricultural industry. Pharma/medical device companies are constantly faced with buy vs. build decisions. Similar to these companies, Monsanto should develop both capabilities and make decisions on an IP-level bases. In instances where IP is available to buy in foreign countries and it is cheaper than building it themselves, they should acquire, capitalize on the IP in the foreign jurisdiction, and bring the technology back to the U.S. for other use cases. If the IP does not end up having monetizable use cases in the U.S., acquiring this IP still acts as a defensive move against other large agriculture companies. This is important in the increasingly competitive and consolidating market that Patrick alludes to.
Super interesting article! It’s right at the intersection of several issues I care a lot about. I actually see this as two separate (but somewhat related) issues: economic protectionism (e.g., tariffs) and intellectual property rights regimes.
Economic protectionism: For Monsanto’s product-based product lines, economic protectionism actually benefits the company since higher prices for farm outputs supports greater profitability for the inputs like fertilizers that Monsanto provides. To the extent that such protectionism increases in other countries around the world (thus improving the ability to pay of farmers for investing in inputs like fertilizers), this could actually improve the market for Monsanto’s products, assuming that local alternatives (e.g., domestic fertilizer companies) do not exist which local governments would otherwise seek to protect. This may not be true for higher innovation countries like India where local alternatives exist but could be true to selling into the least developed countries.
Intellectual property: There is pretty big debate right now in the development community about what role IP rights play in development. An interesting lit review by RAND argues that there is a dual-effect: for the poorest countries, imposing stringent IP protection of Western countries prevents countries from ‘catching up’; however, as income increases and capabilities develop, IP protection incentivizes investment in R&D necessary for further development [1]. In general, the direction that the conversation seems to be moving is that Western countries should relax their expectations and constraints on poor countries, trading off near-term profits for greater ‘catch up’ and poverty reduction [2].
For Monsanto, what I think this means is that selling IP into middle income countries in transition (e.g., Argentina) is going to be challenging because the temptation for companies to steal IP is too high until countries create more robust IP regimes. Creating partnerships or joint ventures with locally owned seed companies in middle income could help create incentives for governments to support IP rights sooner since it will be protecting companies at home rather than just foreign corporations. Selling IP into the least developed countries, however, I think poses fewer risks to Monsanto since the ability of local firms to reverse engineer the IP is much lower. There are also many viable partners in the form of donors and NGOs – such as the Gates Foundation-funded Alliance for an Agricultural Revolution in Africa (AGRA) – which have programs for aggregating and connecting local seed companies to improved crop varieties [3]. The market opportunity for Monsanto to operate with credible partners like Gates, which governments of poor countries are hesitant to offend by stealing IP, could be substantial.
Sources:
[1] RAND lit review on IP in developing countries: https://www.rand.org/content/dam/rand/pubs/technical_reports/2010/RAND_TR804.pdf
[2] Commentary on report from Commission on Intellectual Property Rights (by UK’s DFID): https://www.ncbi.nlm.nih.gov/pmc/articles/PMC1124098/
[3] Overview of the AGRA’s Program for Africa’s Seed Systems (PASS): https://reliefweb.int/sites/reliefweb.int/files/resources/agrapassreporthires.pdf
The isolationist behavior of some countries is a real problem to business models similar to Monsanto’s. My concern is that they may not be able to solve it by either developing more IP in-house versus buying other companies. Even the acquired IP may face similar issues in foreign geographies. One potential solution could be structuring the IP licensing contracts differently with more legal protections against such force majeure incidents. For instance, Monsanto could split the licensing contracts into a combination of a larger upfront payment and a smaller royalty. The upfront payment can be used as an escrow amount / insurance against any such problems arising in the future. This obviously creates more barriers for Monsanto to sign up new licensing customers and puts the company at a competitive disadvantage. However, if the technology is differentiated and adds enough value to the end consumer, Monsanto might be able to implement it.
This is an interesting read, thank you for sharing, Sarah. I totally understand how Monsanto as a for-profit company has taken advantage of economic protectionism and wants to avoid entering economically inhospitable companies. Your analysis well addressed the point that those incentives have prevented the company from pursuing innovations.
As much as I’d like to encourage more innovations in Monsanto, I really can’t see significant financial benefits and incentives for the company to invest in innovative talent while protectionism is still in place. Otherwise it will require a big change in the entire organization culture to make it happen, and I presume that will be a challenge as a conglomerate. Technology has potential to disrupt the trend though, as it can increase productivity or further cut down costs in unexpected ways. Also with the globalization and fast-changing political climate observed in many countries, Monsanto should get prepared for what may come in the near future.